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June 23, 2010

Nine Funds to Ride Out a Double-Dip

Here's how you can position your clients' portfolios, if the economy slows again and experiences a double-dip.

The U.S. economy appears to staying on the comeback trail, even if it's a jobless recovery so far.

But how can you position clients' portfolios, if the economy slows again and experiences a double-dip?

There are two no-load mutual funds that I find very helpful in reducing volatility (especially on the downside) when designing portfolios.

They are: (1) the Permanent Portfolio (PRPFX), managed by Michael Cuggino, and (2) the Hussman Strategic Total Return (HSTRX), managed by John P. Hussman.

I often use these funds in conjunction with each other, since the managers' strategies tend to differ -- even though they both fall into the conservative-allocation fund category.

Both funds meet the following criteria:

o Five-star Morningstar rating

o Inception more than five years ago

o Same manager for last five years or more

o Bear market decile rank of 1

o Beta less than 0.8

I may allocate 20 to 60 percent of a portfolio to these two funds (e.g., 10 to 30 percent each) depending on the client's situation, risk tolerance, and market conditions.

This strategy can provide the desired stability to allow additional risk to be factored into the portfolio and potentially boost return, while not significantly jeopardizing the overall return in a negative market.

Jody Team, CFP, Team Financial Strategies, Abilene, Texas

We have developed a "flexible fund" allocation as the core of our portfolio to allow client portfolios low correlations to the overall stock market, while still giving opportunities for return.

One of my favorite funds right now is Hussman Strategic Growth (HSGFX).

John Hussman has done a great job of reducing market risk by using options markets, while investing in companies with long-term investment merit.

Other funds in our flexible funds category are Arbitrage Fund (ARBFX), which seeks out merger and acquisition opportunities and has maintained low market correlations; Leuthold Asset Allocation, (LAALX) which is a go-anywhere fund that can outperform in up or down markets; and TFS Market Neutral (TFSMX), which is a long-short fund but is currently closed to new investors.

Right now, we believe deflationary forces are weighing on this market.

In January and February, we began buying long-term Treasurys through funds such as the Vanguard Extended Duration Treasury Index (VEDTX).

In December of 2008, 20- to 30-year Treasury yields were down below 3 percent, which allowed for great returns as prices went up.

Over the course of 2009, those rates got to around 4.6 percent, and so far this year, we are already seeing rates back around 4 percent on this bonds giving VEDTX over a 16 percent return year-to-date per Morningstar.

John B. Cox, CFA, CAIA, MBA, Charles D. Haines LLC, Birmingham, Ala.

A suggestion I have is Eaton Vance Global Macro Absolute Return Fund (EIGMX).

This fund is managed using long and short positions in currencies, interest rates, sovereign debt and other categories across the globe.

There are five people that work on the portfolio, each having different geographic responsibilities. The fund is managed to be positive in all environments.

While it's only been available in mutual fund format for a few years, the strategy has been successfully managed for many years as part of a broader Eaton Vance fund.

If you consider the track record before the mutual fund was launched, it has one of the best risk-adjusted returns (Sharpe Ratio) in Morningstar's universe.

The fund was very early in identifying the problems with Greek bonds and with the Euro, and they structured trades to capitalize on the expected weakness.

Carl J. Macko, MBA, CFP, Synergy Capital Management LLC, Atlanta

The Forester Value (FVALX) is a U.S. large-cap equity fund.

This fund is specifically designed to protect investors when the stock market outlook may be considered "shaky" or "uncertain."

In fact, it has the distinction as the number-one mutual fund out of 1,700 that actually increased in value during 2008 (according to the Wall Street Journal).

During this bear market year, the fund returned 0.4 percent, while the majority of its competitors posted negative returns in the double digits.

The fund also earned the top position in Morningstar's Large Cap Value category for 2008, 2004 and 2002. It has posted positive returns in eight of the past nine years, easily outpacing the S&P 500, which has been positive in only five of the past nine years.

The fund also posted positive returns in 2000, 2001 and 2002 years, when the S&P 500 was negative.

On the downside, the defensive characteristics are particularly evident during bull-market years, such as 2009, when the fund trailed 79 percent of its peers.

It is rated five stars by Morningstar. The fund has $104.2 million in assets, a respectable management expense of 1.27 percent and no loads.

Microsoft, Hewlett-Packard and Chevron are three of its top holdings.

Some of the more statistical reasons. which explain the fund's ability to outperform the broader market in bear markets, are: (1) R-squared of only 52 percent, meaning that barely half of the fund's movement can be explained by movement in the S&P 500; (2) beta of 0.5, indicating that the fund will be half as volatile as the S&P 500, particularly important in declining markets; and (3) alpha of 6.85, indicating the fund managers are adding value.